Here are some thoughts I wanted to share.
Often time I get approached by people who try to convince me that renting a house or an apartment is a waste of money. “You may as well be throwing all that money through the window” some will say. I actually bought my first house in my last few years of college and I sold it in the late 90’s. It paid off all of my student loans and I even ended up with over $100,000 in profits. I considered myself extremely lucky. I have been happily renting ever since, not because I think renting is better than buying, but rather because it saves me more money long term.
I’ll say buying a house as an investment is often time a bad idea. I strongly believe that people should buy a house if they like it and they want to live in it, not to make money.
Let’s put some math behind this. I’ll start with the cost of renting. Your yearly cost will be monthly rent * 12. Simple. Chances are you water bill is included. If you need a light bulb replaced you call up the landlord and you get it fixed. Maintenance cost is included.
Historically there is a trend that says if a house price divided by the yearly cost to rent the same is above 20, people are more likely to rent. If it’s below, the rent price would be considered too high which would drive the buyers’ market. If you look at the last 10 years the ratio has been over 30 in most north bay cities. I lived in a million dollar house with a ratio of 35 for 5 years paying as little as $2380 per month.
At 6 % mortgage rate, the price you would be paying on the mortgage interest per month is close to 0.5% of the house price. This money is completely dead and has no return. It is no different than the rent. Take the mortgage deduction into account and you end up with about 0.3% of the house cost you pay per month. Still not that great.
So Let’s take a look
House price: $1,000,000
APR: 6%
Your monthly interest payment is 0.3% of the house price per month => 0.36 * $1,000,000 per year = $36,000 per year
The price to rent ratio: 1,000,000 / 36000 = 27.8
You’reIf you need a light bulb replaced you call up the landlord and you get it fixed. Maintenance cost is included.
Historically there is a trend that says if a house price divided by the yearly cost to rent the same is above 20, people are more likely to rent. If it’s below, the rent price would be considered too high which would drive the buyers’ market. If you look at the last 10 years the ratio has been over 30 in most north bay cities. I lived in a million dollar house with a ratio of 35 for 5 years paying as little as $2380 per month.
At 6 % mortgage rate, the price you would be paying on the mortgage interest per month is close to 0.5% of the house price. This money is completely dead and has no return. It is no different than the rent. Take the mortgage deduction into account and you end up with about 0.3% of the house cost you pay per month. Still not that great.
So Let’s take a look
House price: $1,000,000
APR: 6%
Your monthly interest payment is 0.3% of the house price per month => 0.36 * $1,000,000 per year = $36,000 per year
The price to rent ratio: 1,000,000 / 36000 = 27.8
You’re thinking that’s good. Yeah but we’re forgetting the maintenance cost and the yearly property tax, both of which are an additional 1% of the house cost per year.
After tax deductions on the property tax you’ll end up paying an additional 0.6% of the house cost per year
Maintenance is still about 1%. So now you have 0.3% + 1.6% => 1.9% per month of the cost => 0.52 * $1,000,000 per year => $52,000
House cost to rent ratio: 1,000,000 / 52,000 = 19.23
You may say, yes but the house value appreciates. You are right, it does but by how much? For the past 200 years it has appreciated a mere 0.4% a year, adjusted for inflation. Now ask yourself, would you pour a million dollars into an investment that would give you a return of 0.4% per year long term? Not me.
So again, owning a house is a wonderful thing, but if you are simply buying it to make money you m